What Is a Widow Maker?
Let me explain what a widow maker means in the financial world. It's an investment that can lead to huge, even catastrophic losses. Sometimes, it refers to a trade where almost everyone who tries it ends up losing money. Outside of finance, the term colloquially means anything that could kill someone quickly, and it's been used historically in fields like forestry and medicine.
Key Takeaways
You should know that in financial markets, a widow maker is a trade resulting in large or even catastrophic losses. It can also describe a trade where the market keeps defying what most people expect, even ignoring historical trends, leading to losses for all who attempt it. The term has roots in forestry and medicine, where it signals the risk of sudden death. A typical example in finance is trading natural gas futures. The most infamous one is shorting Japanese government bonds, as the government keeps driving interest rates lower.
Understanding a Widow Maker
As a trader, you might hear the term widow maker applied to investments that cause massive losses or carry enough risk to do so. In forestry, it refers to loose branches overhead that could fall and kill someone suddenly. In medicine, it's a blocked artery that could lead to a fatal heart attack. Excessive risk is often key in these financial widow makers. Remember, investments promising high returns usually come with the potential for big losses. Investors decide based on their risk tolerance for a certain return—this is the risk/reward ratio. Some widow maker trades seem rational and not overly risky at first, but the market ends up confounding expectations and defying history.
Real-World Examples
Take shorting Japanese government bonds, or JGBs—it's probably the most famous widow maker trade. Over the past two decades, traders have shorted JGBs as Japan's debt kept climbing. Normally, that would be a smart move, but the central bank pushed interest rates to record lows, even negative, driving JGB prices up and causing losses for many traders.
Amaranth and Commodities
Another example is in natural gas futures, which pros have long called widow makers due to their wild price swings. In 2006, the hedge fund Amaranth Advisors placed a huge leveraged bet on natural gas futures, hoping to repeat a successful trade from the year before. Amaranth was a $9.5 billion fund, but it had to shut down after massive losses in the natural gas market. Their energy team chased high rewards with a risky trade in a volatile market, amplified by leverage. Instead of profits, they lost $6 billion when natural gas prices crashed, forcing the fund to liquidate.
Natural Gas Today
The widow maker spread in energy markets is between March and April natural gas futures. March is typically the low point because trading peaks in winter for heating needs. That's when utilities pull gas from storage, and April is when they start refilling. A wide spread means high demand; a narrow one means low demand. In December 2021, gas futures hit a three-month low, and the widow maker spread reached a 20-month low, showing ample stockpiles. If you're on the wrong side, misjudging supply and demand, you could face big losses.
What Is a Widow Maker Stock?
A widow maker stock is one with high risk and potential high returns, capable of causing major losses to investors. It usually doesn't point to a specific stock but to a type of trade that could wipe out your investment.
Why Is Natural Gas Called the Widow Maker?
Natural gas earns the widow maker label because traders try to profit from the spread between March futures—when trading dips at winter's end—and April futures, when utilities restock. Depending on winter demand, if you misjudge the spread and bet wrong, your investment could be devastated due to the spread's volatility.
What Is the Japanese Interest Rate?
Currently, the Japanese interest rate stands at -0.10%.
